Union Pacific Corporation (and railroads in general) has performed strongly over the past 15 years
UNP is up 11.8% in the past 3 months
The volume of rail transport for 2021 was significantly higher than in 2020
Wall Street analysts' consensus outlook is bullish, with modest upside potential
The market implied outlook for UNP is bullish through the middle of the year and neutral for the full year.
Union Pacific Corporation (NYSE:) gained a total of 15.9% in the past 12 months, albeit with a significant decline from mid-August to the end of September. Investors brave enough to buy shares in the railroad company at the end of September, when they traded for just $196, could have gained a staggering 25.6% in the ensuing 3 months.
Source: Investing.com
Train volumes for 2021 were 5.7% higher than in 2020 and UNP reported strong quarterly results, beating analyst estimates in Q2 and Q3. The consensus estimate for EPS growth over 3-5 years is 12.3%, in line with the annualized dividend growth rate of 13.7%. This alignment is notable because dividend growth appears to be supported by earnings growth, without increasing the payout ratio. Green (red) values ??are the amount by which the quarterly profit exceeds (misses) the expected consensus value. to the expected consensus level. Granted, many of analysts' forecasts are based on management guidelines, but not many companies can consistently come close to expectations. Railroad Industry and US Stock Market
Source: Morningstar.com
Many readers will be surprised to learn that UNP has delivered total returns well above the US stock market over the past 15 years. UNP's total annualized return over 15 years is 18% per annum, compared to 10.5% for the . UNP's total return has also beaten the S&P 500 over the lagging 3, 5 and 10 year periods. The most obvious concern at UNP is the current valuation, with a TTM P/E of 26.5. . Historically, UNP has ranged between P/Es of 10 and 20, so the current valuation looks a bit stretched. . At the time, Wall Street's consensus rating on UNP was bullish, but its 12-month consensus price target was only about 4.5% above the share price. With the dividend yield of 1.74%, the expected total return over 12 months was only about 6.25%. In addition to the high valuation and analyst consensus, I also relied on the market implied outlook for UNP, which represents buyers' and sellers' consensus view of options. In mid-April 2021, the market implied outlook for UNP was neutral until mid-January 2022. I chose a neutral overall rating for UNP over a bullish rating, largely because of the high valuation, the modest expected price increase from the consensus price target, and the neutral market-implied outlook. Since my post, UNP has gained 10.3% (price increase only) versus 11.56% for the S&P 500.
My previous analysis looked at the market implied outlook using options expiring January 21, 2022. Now As that date is fast approaching and UNP is reporting fourth quarter earnings on January 20, 2022, I've updated the market implied outlook for UNP and, as in my previous analysis, compared the Wall Street consensus outlook. Wall Street Consensus Outlook for UNP
E-Trade calculates the Wall Street consensus outlook based on ratings and price targets published by 21 ranked analysts over the past 90 days. The consensus rating is bullish as it was last year. The 12-month consensus price target is 7.5% above the current share price. With the current dividend yield of 1.9%, the expected total return for the next 12 months is 9.4%. ]
Investing.com's version of Wall Street's consensus forecast is based on ratings and price targets from 30 analysts. The consensus rating is bullish and the 12 month consensus price target is 4% above the current price.
These two Wall Street consensus forecast calculations are consistent, with bullish ratings. The 12 month price targets are slightly different, averaging 5.75%. The expected 12-month price increase is low, albeit still slightly higher than the April value (4.58%). tend to be somewhat optimistic that the current outlook is conservative. The projected total return of 7.65% for the next year is less than half of the 3-, 5-, 10- and 15-year annualized values. An option's price on a stock reflects the market's consensus estimate of the probability that the stock price will rise above (call option) or below (put option) a specified level between now and when the option expires. By analyzing call and put option prices on a series of strikes, all with the same expiration date, it is possible to calculate a probabilistic price prediction that reconciles option prices. These are the market-implied outlook.
I have calculated market-implied outlook for the next 2 months (using options expiring on March 18, 2022), the next 5 months (using options expiring on June 17, 2022) and for the next 12.1 months (using options expiring January 20, 2023). I have selected these three due dates to provide outlook for the following year. The standard presentation of the market-implied outlook is in the form of a probability distribution of price returns, with probability on the vertical axis and returns on the horizontal. The implied outlook for UNP for the next 2 months is generally symmetrical, although the spike in probabilities has tilted in favor of positive returns. The maximum probability corresponds to a price return of +2.25% and the annualized volatility calculated on the basis of this distribution is 23.9%. This is a low level of volatility for an individual stock.
To make it easier to directly compare the probabilities of positive and negative returns, I rotate the negative returns side of the distribution around the vertical axis (see chart below). ). The negative return side of the distribution is rotated about the vertical axis.
This view shows that the probabilities for positive returns are higher than for negative returns of the same magnitude for a wide range of the most likely outcomes (solid blue line is consistently above the dotted red line on the left half of the chart). This is a bullish outlook. The odds of large negative returns are slightly higher for large outcomes (returns greater than +/- 15%), but these occur with a low overall probability. Theory suggests that the market-implied outlook is likely to have a negative bias because risk-averse investors are willing to pay more than fair value for downside protection (put options). Given this potential bias, the market implied outlook for the next 2 months looks even more optimistic. is also bullish, although the spread between positive and negative yield opportunities is slightly narrower. The annualized volatility calculated on this outlook is 25.7%.
UNP Market Implied Price Return Opportunities from Now to June 17, 2022
Source: Author's calculations using option quotes from E-Trade. The negative return side of the distribution is rotated around the vertical axis. Looking at a full year, the market-implied outlook, calculated on options expiring on January 20, 2023, is somewhat favorable for negative price returns. Given the expected negative bias, this outlook is best interpreted as neutral. The calculated annualized volatility for this distribution is 27.7%. Source: Author's calculations using options quotes from E-Trade. The negative return side of the distribution is rotated around the vertical axis.
The market implied outlook is bullish for the next 2 months and the next 5 months, although the bullish tilt is smaller for the 5 months. outlook. The market implied 12.1 month outlook is neutral. Expected volatility increases slightly over the year.
Summary
UNP has provided investors with consistent long-term performance. Total returns over the past year are close to, if slightly lower than, annualized 3, 5, 10 and 15 year returns. The consensus of Wall Street analysts is bullish, but analysts view the potential upside as quite limited. The consensus price target for 12 months implies a total return of 7.65%. As a rule of thumb for a buy recommendation, I want to see a 12-month expected return that is at least half of the expected (year-on-year) volatility. With expected volatility in the range of 24% -28%, the expected return of 7.65% UNP does not look attractive as an attractive risk-return proposition. That said, the April analyst consensus price target was well below the current price.
The market implied mid-2022 outlook is bullish, although the market implied 12-month outlook is neutral. Heading for earnings, with a bullish Wall Street consensus rating and the near-term bullish market implied outlook, I am giving UNP a bullish rating. However, the relatively high valuation and neutral outlook for the next 12 months suggest that this analysis should be revised sometime around mid-2022.
